Key Decision on Corporate Separateness – English High Court Decides Not to “impose liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”

by Latham & Watkins LLP
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In a highly anticipated judgment, the English High Court has ruled that Royal Dutch Shell (RDS), a holding company that is the ultimate parent of the Shell Group, does not owe a duty of care to residents of the Niger Delta in respect of alleged environmental damage said to have been caused by the operations of one of its Nigerian subsidiaries.

The decision is significant because it deals more generally with the issue of corporate separateness in large multinational groups, particularly in the context of corporate social responsibility, and allows for a greater understanding of the circumstances in which a parent company might attract civil responsibility for the acts and omissions of a subsidiary.

Increased awareness and public scrutiny over group structures and the corporate integrity of groups, means companies and investors alike (including private equity investors), should pay close attention to the outcome of this judgment and its potential implications.

Court decision

The court concluded that the claims based on an alleged duty of care between RDS and those living in the vicinity of certain operations of its Nigerian subsidiary were “bound to fail”. The following key principles emerge from the judgment:

  1. The starting point is the three-part test in Caparo v Dickman (proximity, foreseeability and reasonableness) and the decision of the House of Lords in that case that the law of negligence should develop incrementally and by analogy with established categories of relationship in which a duty of care has been recognized
  2. Membership of the same group does not of itself clothe a parent with responsibility for the acts of its subsidiaries. However, in some factual situations a parent company may owe a duty of care in relation to the acts or omissions of a subsidiary.
  3. A parent company may owe a duty of care if: (i) it carries on the same business as its subsidiary; (ii) has superior knowledge or expertise compared to that of its subsidiary; (iii) has intimate knowledge of the subsidiary’s system of work; and (iv) knows that the subsidiary relies on it to avoid a particular type of damage. Where a subsidiary is run as a division of a parent company or there is high degree of interference and control by the parent in and over the operational decision making of its subsidiaries, the potential for parent company exposure is more real. There mere existence of group wide policies whether mandatory or not of itself does not demonstrate a high level of control or reliance.
  4. Including for these reasons, a parent company is to be distinguished from a holding company which by definition has no operating activities and is also therefore highly unlikely to have the superior expertise which might (depending on the facts) lead to a finding of responsibility. This is so, even if the holding company appoints directors to the board of its subsidiaries. Case law has been clear to distinguish between parent companies and pure holding companies.
  5. Public disclosures made by multinational groups about the group’s commitment to safe and sustainable business practices in the context of meeting listing obligations are of themselves in most, if not all, cases insufficient to support the imposition of a duty of care on the parent of the group.
  6. A finding of parent company liability in the context of a multinational group would likely give rise to “liability in an indeterminate amount, for an indeterminate time, to an indeterminate class”. For that reason, it is unclear whether third parties will ever succeed in establishing the requisite degree of proximity between themselves and the parent of a large multinational group.

Environmental Social Governance (ESG) implications

In reaching its decision, the Court laid down some interesting practical points to note in relation to ESG implications.

The claimants case focused heavily on public disclosures made by RDS in the context of its listing obligations and on group wide policies, some mandatory, concerning environmental and safety issues among others.

However, the Court held:

  • It is highly unlikely that compliance with public disclosures made by parent companies around their group’s ESG matters will of itself ever be sufficient to establish a duty of care on the part of a parent. Certainly there is no legal authority to support the imposition of a duty of care on that basis.
  • In fact, such public statements are often a function of the listing regulations, e.g., London Stock Exchange, and are made by companies in order to fulfil their relevant listing obligations.
  • Even if passages in public documents that state the policies of a group of companies could be construed as being sufficient to establish a presumption of responsibility on the part of the parent, carefully drafted disclaimer language can effectively negate that presumption.
  • It would be counter-productive to the availability of information for investors about the activities and aspirations of listed companies if the contents of generic statements, e.g., the implementation of a global policy on sustainability was held against different companies of the group when they are permitted to organise their corporate affairs through separate legal vehicles that are protected by the corporate veil.

Conclusion

The question whether or not a duty of care may in principle be imposed on the parent for the acts/omissions of its subsidiary will depend on the facts of the particular case. The judgment does reinforce the importance of observing corporate separateness not only on paper but also in practice. As we move into an era of non-financial reporting and ever greater transparency around corporate social responsibility, it is also a timely reminder of the importance of the precise language used in such disclosures.

Latham partner Sophie Lamb was co-advocate for RDS and SPDC.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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